Risk Aversion in a Model of Endogenous Growth

Christian Chiglino and Nicole Tabasso
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Christian Chiglino: University of Essex

No 314, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Despite the evidence on incomplete financial markets and substantial risk being borne by innovators, current models of growth through creative destruction predominantly model innovators as risk neutral. Risk aversion is expected to reduce the incentive to innovate and we might fear that without insurance innovation completely disappears in the long run. The present paper introduces risk averse agents into an occupational choice model of endogenous growth in which insurance against failure to innovate is not available. We derive a clear negative relationship between the level of risk aversion and long run growth. Surprisingly, we show that in an equilibrium there exists a cut-off value of risk aversion below which the growth rate of the mass of innovators tends to a strictly positive constant. In this case, innovation persists on the long run and consumption per capita grows at a strictly positive rate. On the other hand, for levels of risk aversion above the cut-off of value, the economy eventually stagnates.

JEL-codes: O40 O41 O43 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014-07
New Economics Papers: this item is included in nep-dge, nep-gro and nep-upt
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https://repec.som.surrey.ac.uk/2014/DP03-14.pdf (application/pdf)

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Journal Article: Risk aversion in a model of endogenous growth (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0314

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